January 2007

Paul Apfelbach

Judy Pemberton knows just about everything about condos. She’s lived in them and she sells them. So her words — or mantra — for potential condo buyers is worth some attention. Her instructions are simple: get involved, do your research.

When you buy a condo you own a portion of the building in which you live. You also share ownership of common areas, including interior hallways of a high-rise condo development and exterior areas such as walking paths. The cost of maintaining the property is shared by all owners through a monthly fee or assessment.

And it’s those fees, says Pemberton, director of the condominium sales division at Ogden, The Real Estate Co., that prospective buyers typically have the most questions about. "Read the condo documents, learn about the fees," Pemberton says. "Look at what these fees include, because all of those goodies that a development offers like swimming pools and fitness rooms can also impact the fees. There are costs for liability and upkeep with those." Pemberton says the amount of land in a condo development can affect monthly fees as well.

Once a client buys a condo she encourages them to get involved with the development’s governing board or association. The board can create specific rules for a development and it typically has periodic meetings — some just once a year — to deal with various issues, including condo fees. "I’m not saying you have to sit on the board," she says. "Just get involved. Attend the meetings. Many people who buy condos want maintenance-free living, so oftentimes they don’t really get involved in what’s going on internally on the board," she says.

Paul Apfelbach, owner of Heron Pond Development in Mequon, has developed several condominium developments, including Essex Place, Heron Pond and Hidden Creek. He says there is a widespread misunderstanding and lack of knowledge about condos, how they are operated and what condo fees are. "People are all caught up in the emotion of buying a place to live and then they are handed condo documents that are 2 inches thick," he says. "And they say, ‘Everybody lives in condos. I don’t need to read this.’ And then there is a real potential for disappointment or adjustment."

Judy Pemberton

He says buyers not only don’t read the documents, which explains the condo owner’s and condo association’s different responsibilities, they oftentimes don’t understand what they are reading. "The documents can be so vague that two perfectly intelligent people can read it and come up with two different conclusions," he says. "I’ve seen two educated people get into a fight over a $300 mulching bill."

Apfelbach stresses the importance of reading and understanding the condo documents before buying a condo. He says it is also important to understand what condo living means. "You’ve got to have some tolerance and understand that there isn’t a completely fair scenario," he says. "If they’re not tolerant to community living, then they shouldn’t move into a condo."

Mark O’Neill, a real estate attorney with Godfrey & Kahn, says buyers need to remember that condo fees are the "function of the costs to run the organization." And size and scope of that organization and its board can determine the fees.

O’Neill and Pemberton say buyers should make sure the condo association has some sort of reserve fund. This fund will help cover unexpected costs and pay for larger projects such as putting in a new roof. "You don’t want to move in and then find out a large special assessment is coming your way," O’Neill says.

O’Neill says although it’s important to be cautious, buyers should also realize that running and maintaining a development costs money. "People simply need to be realistic on the cost of running a condo development," he says. "All real estate projects are different. But if it seems too good to be true, it probably is.

"If the condo fee is so low, you need to ask, ‘How could the association possibly cover the costs of maintenance?’"

Apfelbach says whether a development has a reserve fund that is 100 percent funded by the owners depends on its demographic. "If you have a project that is more entry level, you’ll probably want your buyers to pay as they go (through a monthly fee)," he says. In a higher-end development, the owners may prefer to control their money through investments and be assessed a large fee to pay for a roof or other improvements on a periodic basis. "But you need to make sure your owners have the wherewithal to pay for that roof when the time comes," he says. "Because the association has a right to do it and take legal action if they don’t pay."

O’Neill says there is varying degree of developers — some who are conservative with their condo fee estimates and others who low-ball the fees in hopes of attracting buyers. Both tactics can be a detriment to the developer. If the costs are too high it can scare buyers away. And if the fees are low and then rise after someone buys the condo, it can hurt the developer’s reputation and make it difficult for them to sell the rest of the condo units.

"In the end, you can have purchasers who are very upset and it can impact the project," O’Neill says.

Apfelbach says fees sometimes rise after the condo association takes over because the developer used his own crew to maintain the landscaping. Once the developer steps away from the project the association must now pay for those services. He says the most common source of rising fees is at the association level. "Buyers have to understand the fees are related to a budget and the budget is related to a bundle of services," he says. "And every service imaginable is possible. You get people who value things differently within a development. Some may not care about throwing salt on a sidewalk for themselves, while others practically want to be waited on."

He says an association board must understand that maintenance is important, but each new service can cause fees to rise. "An association’s budget can be wiped out because of excessive salting," he says. "You’d be surprised how expensive that is."

Nicholas V. Gouletas, CEO and founder of NVG Residential Inc., says he spends considerable time figuring out how much it will cost to run a condo development. Gouletas is currently converting the Landmark on the Lake high rise on Prospect Avenue in Milwaukee into 275 condos.

Gouletas says he looks at the last three years of an apartment building’s expenses to help determine the cost of maintaining it as a condo development.

He also forecasts future capital improvements and includes this in the condo fees. A portion of each condo owner’s monthly fee goes into a reserve fund.

He says he makes sure his budget is as accurate as possible because, "I’m going to be there next year and I want to know that I can always look at those buyers in the eye."

The assessments at Landmark on the Lake range from $266 to $327 a month for a one-bedroom condo to as high as $460 to $550 a month for a condo with three or more bedrooms. The development’s many amenities including a 24-hour doorman, 24-hour fitness center, indoor pool, concierge services and sports deck that contribute to the total condo fee.

"The most common question I get is, ‘What are these fees and where do they go?’" he says. "Really a condo is about the same cost as a house. But the difference is when your home needs a new roof you can’t go down the street and ask your neighbors to help pay for it. With a condo everyone helps pay for it."